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An example of an optimal forecast exhibiting decreasing bias with increasing forecast horizon

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>10/2013
<mark>Journal</mark>Bulletin of Economic Research
Issue number4
Volume65
Number of pages10
Pages (from-to)362-371
<mark>State</mark>Published
Early online date4/04/11
<mark>Original language</mark>English

Abstract

Motivated by a central banker with an inflation target, we show that the optimal forecast bias under non-quadratic loss functions and non-normal forecast errors can decrease or initially increase and then decrease with the forecast horizon. We initially proof that, if the variable to forecast can be described by a generalized Rayleigh distribution, its conditional mean does in general not constitute the optimal prediction under a symmetric target zone loss function. Subsequently, we approximate the target zone loss function to show the potential for variation in optimal bias over the forecast horizon.